By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Brad Stone’s new book “The Upstarts,” is subtitled “How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World,”[1] is the first book-length treatment of these companies. Stone is senior executive editor for technology at Bloomberg News; his previous book was 2013’s “The Everything Store”[2], a corporate history of Amazon. Stone relies heavily on published news stories and interviews with Uber CEO Travis Kalanick and Airbnb CEO Brian Chesky. The material in the book is split roughly evenly between the two companies, although the comments below will focus on its coverage of Uber.

Does “The Upstarts” provide any new information or thoughtful arguments for people who have been following the Naked Capitalism Uber series, or who are interested in the wide range of issues raised by Uber’s rapid ascendency? Unfortunately not. The major deficiencies in Stone’s argument illustrate why tech industry and mainstream business media coverage has not only failed to investigate seriously the reasons for Uber’s unprecedented growth but also has abandoned any pretense of journalistic independence to become a de facto advocate for Uber’s corporate interests.

Stone openly admits he is not an independent, objective observer, but is out to tell the story Travis Kalanick wants told.

Amazon executives declined to talk to Stone for his previous book, and Stone describes how he proactively sought the cooperation of Uber and Airbnb for this book. Airbnb readily agreed to cooperate, but Kalanick initially refused in early 2015 (“There’s no way in hell I’m cooperating with a book about Uber right now”) and had to be wooed. Stone quotes himself (p.13) as telling Kalanick “If you want people to embrace a radical future in which they give up their cars you have to allow journalists to explain and demystify your story. If you want to change the way cities work, Uber must be understood.” Kalanick remains skeptical, so Stone goes on to describe a narrative featuring backward politicians and regulators protecting “the big taxi guys” while Uber struggles to roll out its innovative new product.

Thus “The Upstarts” cannot be considered journalism; it is Stone’s personal contribution to Uber’s ongoing propaganda program. This is not to say that Stone presents a whitewashed or otherwise warped depiction of events; numerous Uber criticisms and missteps are noted and Stone’s story would have no credibility if he hadn’t. But Stone suggests criticism of Uber is overwhelming driven by vested interests protecting an inefficient status quo and each mention of Uber missteps (e.g. journalist harassment, lying about potential driver earnings) is immediately followed by emphatic claims about Uber’s true virtues.

Stone insists that the multiple reports about Uber harassment of journalist Sarah Lacy and Johanna Bhuiyan under the direction of executive Emil Michaels were all totally fabricated; Michaels only wanted to “create a coalition for responsible journalism.” (p.262). Stone elided the fact that Uber claims that its drivers made over $90,000 a year was willful dishonesty by suddenly focusing on how a Uber recruiter on Chicago’s South Side was creating wonderful opportunities for people short on cash.(p319-21). Willful refusal to obey existing laws is honorable because those obstacles would prevent Uber from “unlock[ing] the true potential of an on-demand transportation service.” (p.299)

As is often seen with writers whose stories are based on access to key insiders, they can help flesh out bits of the historical chronology, and provide some background color on the personalities and styles of those insiders. “The Upstarts” provides a perfectly good (and very readable) overview of the “when” and “who” aspects of the Uber (and Airbnb) stories, but is useless to any reader trying to better understand the “why.”

Much of Stone’s story directly follows Uber’s longstanding propaganda narrative

“The Upstarts” endorses every aspect of Uber’s propaganda narrative, without offering any hard evidence supporting any of the claims.

Uber’s growth was based on powerful technological innovation. “[Uber and Airbnb] have scrawled in the annals of entrepreneurship the most memorable stories of a third phase of internet history—the post-Google, post-Facebook era of innovation that allowed the digital realm to expand into the physical one”(p.7) “The idea was this:..if you opened up the service to anyone with a car and allowed him to pick up passengers using a smartphone app? You could fill empty seats in cars, reduce the chronic congestion on America’s highways, and allow drivers to make money on the side.” (p196). “Because the brilliance of this seamless transaction [via Uber’s App] is so widely accepted in the LCD-lit halls of Silicon Valley that it inspired a surge of similar businesses in the fields of food delivery, package pickup, babysitting services, and so on.(p.7).

Stone makes absolutely no attempt to explain the underlying innovations, but wants readers to believe that the ability to order and track taxis on a smartphone was the most powerful innovation in transportation history. Since Stone does not care about cost competitiveness, he cannot explain whether these innovations had any material impact on productive efficiency, cannot explain why they have not made Uber profitable, and cannot explain why no other company in any other industry has been able to achieve major competitive or financial impacts from them. Stone simply ignores the question of whether Uber’s growth might have been driven by predatory multi-billion dollar subsidies for uneconomical prices and service levels.

Uber’s ultra-powerful business model will work anywhere in the world and will eventually displace car ownership. “Even Uber’s most fervent supporters had not grasped the true potential of the business. Uber wasn’t just taking passengers out of yellow cabs, it was growing the overall market for paid transportation.” (p.251) “Kalanick introduced a more inspirational articulation of the company’s mission…to offer transportation as reliable as running water, everywhere and for everyone” (p.261). “Uber was only halfway to its goals..(quoting Kalanick:) “what if I said there’s going to be no traffic in any major city in the US in five years?” (p.330)

Stone notes that Uber was forced to abandon China after suffering staggering losses, but instead of seeing that the business model might not be universally powerful, or emphasizing that it had burned a billion dollars of the investors’ cash, he cited Kalanick’s characterization of the China venture as “romantic” and a chance to “do something interesting and beautiful.” Since Stone completely ignores Uber financial results, he does not consider the possibility that a business model that lost $2 billion in 2015 and $3 billion in 2016 might not ever earn sustainable profits in a lot of places other than China. He also does explain how Uber could ever lower their costs to the point of being cheaper than car ownership if after seven years of operations they are still billions of dollars away from being cheaper than Yellow Cab.

Uber’s survival depended on heroically fighting “the big taxi cartel” and corrupt regulators. “Uber’s expansion also measured the will of local governments to update antiquated transportation laws for a service that many of its own citizens desperately wanted. This was a litmus test for democracy, exposing whether regulators and legislators were more beholden to their own people or to powerful taxi interests and unions.” (p.300) “The meeting thrust Kalanick into the thick of the familiar battle between new technology and the old, outdated ways of doing things” (p.122) As noted, selling this idea was part of Stone’s sales pitch to get Kalanick’s cooperation on the book, and there are unsubstantiated anti-regulatory claims throughout the book.

The idea that a company with $13 billion in funding from Silicon Valley billionaires had to wage a difficult battle with “”powerful taxi interests” who were fragmented and struggling to survive is too absurd to consider seriously. Even though he acknowledges Uber’s growing use of lobbyists, Stone fails to consider whether the question of whether local politicians and regulators might be more beholden to the interests of a rich, powerful company than the interests of their own people, and whether this might raise any questions about the nature of democracy. Stone tells his readers that unlike regulators, Kalanick was a dispassionate seeker of objective truth. “Facts and intellectual arguments, not charm were his weapons, and he wasn’t about to kiss any political rings.” (p.191) However readers were then told that Kalanick’s factual intellectual argument was that regulatory demands that Uber obey existing rules about insurance and safety was just like the decision making in the Soviet Union that led to the rationing of toilet paper.

As with past startups, losses will soon give way to robust profits. “Uber had discovered what startup gurus call the virtuous circle, the links between various parts of its business. Lower prices led to more customers and more frequent usage, which led to a larger supply of cars and busier drivers, which enabled Uber to further cut prices and put more pressure on competitors.” (p.251).

Stone has no evidence backing his assertion about superior driver utilization, or that overall Uber efficiency improved because of this “virtuous circle”, and the claim is directly contradicted by Uber’s actual financial results. If Uber was achieving significant efficiency gains, operating profit margins would improve. Actual margins showed no improvement whatsoever between 2013 and 2015, and only increased in 2016 because Uber unilaterally reduced driver compensation.

Stone explains much of Uber’s growth by “Travis’ Law” which combines the “powerful innovation” and “regulation is the enemy of progress” themes: “Our product is so superior to the status quo that if we give people the opportunity to see it or try it, in any place in the world where government has the responsibility to be at least somewhat responsive to the people, they will demand it and defend its right to exist.” If true, this would strongly support the hypothesis that Uber was “good for society” but Stone has absolutely no interest in helping his readers understand whether it is actually true.

Uber might be good for society if this alleged huge product superiority can be explained on the basis of huge efficiency advantages that allowed Uber to profitably produce superior service at lower cost, but Uber clearly is nowhere near profitability, and Stone completely ignores all questions of productive efficiency or competitive advantage. If marketplace competition has been badly distorted by the ability of Silicon Valley billionaires to subsidize billions in losses in order to drive more efficient producers out of business (as the Naked Capitalism series had documented in detail) than Uber is more likely bad for society, but Stone also ignores questions about subsidies and the pursuit of monopoly.

Stone fails to ask, much less address many of the most important questions that have been raised about Uber

Uber is the most highly valued private company in the world. While it has received more attention in the technology and mainstream business press than any previous startup, its finances and competitive economics are largely kept secret and poorly understood. Unfortunately Stone makes no attempt to even consider (much less present any hard evidence about) a wide range of critical economic questions including:

Will Uber ever be profitable? Stone completely ignores all published evidence about Uber’s multi-billion dollar losses, even though his Bloomberg colleague Eric Newcomer has been one of the main sources for these reports.

Does Uber’s $69 billion venture capital valuation reflect the type of growth and profit potential it might have in the future as a public company? Stone spends two sentences (p.296) mentioning that Uber’s valuation had rapidly grown from $14 billion to nearly $70 billion but makes no effort to explain why Uber became the most highly valued private company in history, or to consider whether the unprecedented valuation is in any way related to unprecedented competitive power or profit potential

Why did Uber raise $13 billion from investors, a staggering larger amount than any previous startup had ever raised? The only “explanation” Stone provides is a Kalanick quote citing the demands of “operating globally” (p.329). Although he has now written books about both companies, Stone never explains why Uber has required 1600 times as much pre-IPO funding as Amazon, which also competes globally.

What did Uber’s investors think would drive significant returns on that $13 billion investment? Stone reasonably places Uber’s funding in the broader context of the post-Facebook tech startup investment frenzy. However, just as he fails to consider why Uber got so much more funding than other companies caught up in that frenzy, he makes no attempt to evaluate why those investors think Uber will produce massively greater returns than those other companies

Why has Uber remained private much longer than past startups, and shown almost no interest in an IPO that might return cash to those investors? At several points Stone seems to presume that Uber had near-term plans to go public, but never explains why they have stayed private much longer than any previous tech unicorn

Are the major investor subsidies that fueled Uber’s growth (by allowing it to offer more service at lower prices) justified by powerful growth economics? Stone completely ignores the fact that traditional taxis need to charge fares covering the actual costs of trips while Uber fares have been massively subsidized by Uber’s billionaire investors. Hypothetically these subsidies might be justifiable if Uber could rapidly “grow into profitability” but he fundamentally ignores the question of how Uber might eventually become profitable, and never examines whether Uber has the growth economics that powered growth and rapid profit improvement at startups (like Amazon); issues such as scale economies are never mentioned.

Will Uber provide drivers with higher pay and better conditions than traditional taxi operators? Uber’s “independent contractor” drivers are integral to Uber’s overall business model, but Stone makes no effort to consider whether drivers will be better or worse off in an Uber-dominated industry. Stone notes (p.185) that in 2012 when Kalanick was still focused on more-upscale black car services, he didn’t think mass market taxi service would work if Uber took the same 20% it took out of black-car fares. But Stone ignores the fact (also first reported by a Bloomberg colleague) that Uber now takes 30% of all fares, suggesting that drivers are now worse off than they had been before Uber entered the market.

How is Uber similar to (or significantly different from) past Silicon Valley-funded unicorns that became profitable public companies? Any comparisons with past startups would depend on the issues that Stone completely ignores such as cost competitiveness, growth economics, profitability, sources of ROI. Stone makes no effort to explain Uber (or Airbnb) in the context of other companies.

Is there evidence Uber could earn sustainable profits in competitive markets or does Uber believe that investor returns require the quasi-monopoly industry dominance it has been explicitly pursuing? In his epilogue Stone rejects the claim that Uber (and Airbnb) are “merely replac[ing] one set of dominant companies with another” but makes absolutely no effort to explain why readers should share his optimism. His quote misrepresents the situation. Uber is seeking quasi-monopoly dominance of an industry has been highly competitive for a hundred years. His history of Uber provides ample evidence that Kalanick and his investors have long been focused on complete industry domination, and have ruthlessly attacked any company, regulator or journalist that might possibly stand in the way of Uber dominance. Nonetheless Stone completely ignores the question of how Uber would behave with quasi-monopoly dominance, or whether the loss of meaningful competition could be justified on the basis of substantially better service at substantially lower prices.

Are driverless cars critical to Uber’s future success? On what basis could one Uber to become a major, profitable player in a future driverless car industry? Stone usefully explains that Uber had never considered driverless cars until Google (an Uber investor) demonstrated their own development projects, and never thought to make serious investments in driverless cars until the Google-Uber relationship soured. But Stone does nothing to help readers understand whether driverless cars are now a secondary/incremental opportunity for Uber or (as Kalanick has said) an “existential challenge,” or to understand any of the issues that will affect how a driverless-car industry might develop.

Stone does pose one of the most important questions about Uber, but fails to answer it, and fails to provide any of the evidence that might allow his readers to draw their own conclusions

The central question considered in the Naked Capitalism series on Uber is whether the shift from the pre-Uber urban car service industry to one dominated by Uber would improve overall economic welfare—would overall industry efficiency be significantly greater, would consumers in cities across the world have significantly greater service at significantly lower costs, would the risks from reduced competition clearly be offset by other gains.

Stone poses his own version of this central question about the impact on overall economic welfare. “Did the benefits of their [Uber and Airbnb’s] dominance outweigh the well-publicized drawbacks? What was their true impact on cities? Were they good for society or bad?” (p.243).

Stone clearly wants his readers to believe that Uber has been good for society, but he is unwilling to explicitly say so, unwilling to clearly lay out how he thinks the tradeoff between benefits and drawbacks should be calculated, and unwilling to explain why he thinks the evidence justifies a positive conclusion.

It is impossible to answer Stone’s “is Uber good for society or bad?” question without hard evidence about all this issues that Stone steadfastly ignores–productive efficiencies, the economics behind Uber’s business model and expected investor returns, the sources and magnitude of competitive advantages over the operators Uber has been driving out of business, the sources and magnitudes of any scale or network economies, and evidence as to how Uber might at some point in the future be able to earn sustainable profits in competitive markets.

The issues directly relevant to answering the “is Uber good for society or bad?” are readily quantifiable—how much more service can Uber profitably provide than traditional operators, how much lower are the prices that Uber can sustainably offer, how much did Uber’s innovations reduce the cost of providing taxi service? Readers cannot draw their own conclusions from Stone’s evidence because he ignores all the major economic issues (Uber prices and services currently depend on massive subsidies—what price and service levels could Uber offer on a sustainably profitable basis?), and the pro-Uber benefits he emphasizes are vague (people really like the convenience of Uber’s ordering app) and/or totally unsubstantiated (Uber has reduced urban congestion).

Stone’s objective in “The Upstarts” is to sell his readers on his own version of Uber’s PR narrative, a propaganda story that is not supported by any hard, verifiable economic evidence.

In Parts Six and Seven of this series, I presented a preliminary overview of longstanding Uber efforts to publicize a PR/propaganda narrative, and how it had enlisted a wide variety of outside journalists and tech industry observers to help them promulgate that story.

Nothing in the Uber narrative was based on any objective evidence of actual industry economics, and every aspect of the narrative is contradicted by the industry economic evidence presented in Parts One through Four of this series, e.g. the lack of profitability, the lack of powerful competitive efficiency advantages; the spectacular failure of Uber China and Uber’s limited penetration of other international markets; the dependence on massive predatory investor subsidies and so forth. Thus the focus of this series has shifted from “What does the economic evidence tell us about the impact of Uber?” to Uber’s narrative and the question of “Why has the public discussion of Uber almost completely ignored economic evidence.”

I have deliberately used “propaganda” (instead of terms such as “marketing”) to describe Uber’s communication strategy, because one of Uber’s key objectives is to frame public discussion around emotive tribal/ideological issues in a way that creates an us-against-then, good guys-versus-bad guys dynamic that blocks any attempts to investigate or debate issues based on objective economic evidence. Stone’s belief that he can “explain” the growth of Uber without using any objective economic evidence needs to be understood in that context.

As discussed in Part Seven, one key element of Uber’s effort to block objective economic analysis of its business model and competitive growth is its aggressive effort to suck tech industry analysts and journalists into this good guys-versus-bad guys dynamic so they will want to become active allies in Uber’s fight against competitors and regulators. Uber has framed its market entry as a heroic battle between innovative technologists fighting to provide consumer a vastly superior product against a backward industry and the corrupt regulators protecting them from competition.

This framing engages the tribal loyalty of many in the technology industries who see themselves as avatars of progress and economic growth. Stone and the analysts cited in Part Seven (to use an expression Stone uses multiple times) clearly seem to have drunk this industry Kool-Aid, and was eagerly enlisted in Uber’s fight. Unlike those analysts, who are willing to consider outside viewpoints and often produce critical analysis, Stone is a committed Uber partisan.

Stone uses extensive interviews with Uber (and Airbnb) executives to flesh out the company point of view, but his 335 pages do not include a single interview with anyone who has any understanding of urban transport economics or anyone who has critically examined any aspect of Uber’s behavior. The Airbnb sections reflect the same tech enthusiast myopia and arrogance—it is not just that you don’t need to evaluate any economic evidence to conclude that Uber and Airbnb are the good guys, you don’t even need to think about the history or cost structure or competitive dynamics of the industry they will inevitably disrupt.

Stone’s book also suffers from the structural problems of “access journalism.” Journalists who focus on cultivating big-name inside sources (such as Kalanick and Chesney) will not get that access (and the cover stories and book contracts it makes possible) unless those sources have complete confidence that they will present the story that the sources want told.

By not focusing on business model economics, Stone incorrectly implies that much of Uber’s strategy was hastily improvised in reaction to unexpected threats

In its early years Stone depicts Uber as strongly focused on developing a niche premium product that was not directly competitive with traditional cabs, and was ideally tailored for large, wealthy cities like San Francisco, New York and the capital cities of Europe. All of Uber’s pricing (roughly double taxi fares plus surge markups on days like New Years’ Eve), product standards (Lincoln town cars) branding (“Everyone’s Private Driver”) and regulatory approach (we should be governed by limo rules, not taxi rules) supported a business model focused on establishing a higher-quality taxi/larger-quantity limo service.

In less than two years Uber had clearly transitioned to a company that wanted to serve all urban car service customers everywhere, and totally displace all incumbent operators, and achieve global industry dominance. Stone, who has focused heavily on Kalanick’s personality and style, and not attempted to explain the economics of Uber’s business model, suggests these major changes in strategic direction were unexpected and haphazard, driven by Kalanick’s sudden reaction to moves by regulators and competitors like Hailo, Zimride and Lyft.

Stone also suggests that little of the early investment in Uber had much to do with the (constantly shifting) understanding of market opportunities, and was mostly an intuitive sense that someone with Kalanick’s personality would remain obsessively focused on investor returns through whatever market challenges unexpectedly occurred.

Stone is clearly correct that investors appreciated Kalanick’s monomaniacal style, and that some investment may have been motivated by a sense of what was currently hot in venture capital circles. But Stone’s hypothesis that Uber lacked an underlying strategic vision and was winging it in reaction to sudden, unexpected threats is contradicted by a lot of the evidence he ignores (and even some of the evidence he presents).

A company narrowly focused on providing limo service in a handful of big cities would not have gotten major attention from major Silicon Valley venture capital investors. That community can display herd mentality and is often guilty of the tech myopia/arrogance discussed earlier where the presumed power of “disruptive innovation” preempts the need to understand the economics of the industry you are trying to disrupt. But historical evidence strongly suggests they are extremely focused on possible sources of outsized returns, and would not have invested these staggering sums into a company unless its strategic vision was sharply focused on potential sources of outsized returns.

Stone’s argument that the investors were simply wagering on Kalanick’s style implies that business models and strategic visions are relatively unimportant and Kalanick would have been just as successful had he run Zimcar, Cabulous, Taxi Magic or any of the other failed ventures that preceded Uber.

A much more likely hypothesis is that Kalanick and his investors always had a global dominance strategy in mind; the initial focus on the upscale niche was always a preliminary step that would avoid serious competitive and regulatory pushback before a stable market position could be secured. Stone even notes that Kalanick’s initial reluctance to commit to Uber full time was because he thought the limo model “was a good idea, just not necessarily a big one” (p.7) quotes Kalanick as early as 2010 as saying “I’ll stop at nothing to see Uber go to every major city in the US and the world” (p.123) and notes that by early 2011 he had “expelled from his inner circle anyone he thought might stand in the way of Uber’s manifest destiny to conquer the world.”(p.153) The transition to a global, mass-market strategy may have been accelerated by those unexpected competitive moves, but was always part of the plan.

Uber’s early investors would have been strongly attracted by the profit potential of eventual quasi-monopoly market dominance, and the idea that Uber’s smartphone linked software platform might serve as the basis of that market dominance. Sherwin Pishevar, formerly a managing director at Menlo Ventures, became an original investor in Uber because he believed the company’s platform could provide the basis for sustainable rent-extraction and the company’s model could scale globally. “Uber is building a digital mesh–a grid that goes over the cities…Once you have that grid running, in everyone’s pockets, there is a lot of potential for what you can build as a platform. Uber is in the empire-building phase.”[3]

By focusing on personalities instead of competitive economics, Stone misses the fact that Kalanick and his investors have always had a clear and strongly coherent focus on the outsized returns that would be possible if they achieved quasi-monopoly dominance of the global car service industry. Kalanick could not have made the rapid responses to new threats that Stone described unless the longer-term global mass-market strategy already had the full support of his major investors, and no company can grow this rapidly without strong strategic alignment between owners and senior management.

By focusing on personalities instead of competitive economics, Stone misses much of the evidence showing that Uber’s growth has not and will not be good for society. Kalanick’s ruthlessness is not a mixed blessing that produced a series of damaging mistakes while the company was still an immature adolescent. Every one of those “missteps” (competitor sabotage, lying about driver salaries, journalist harassment, willfully disobeying laws, etc.) was fully aligned with Uber’s overall efforts to defeat anything that might be an obstacle to its pursuit of global dominance. No Uber executive was ever disciplined and no Uber investor ever publically criticized any of these actions. They were all fully aligned with Uber’s overall efforts to reframe public discussion around a heroic battle against the enemies of innovation and progress in order to block public discussion of Uber’s extremely weak competitive economics. “The Upstarts” lays out a great deal of the history showing that quasi-monopoly industry dominance was always Uber’s central strategic objective, and Stone fails to provide any credible evidence as why that outcome will not be bad for society.

[1] Stone, Brad, The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World, Little, Brown 2017

[3] “Uber doesn’t just set passengers up with drivers. It’s a company starting to dream of becoming a logistical nervous system for cities.” Lagorio-Chafkin, Christine, Resistance Is Futile, Inc. Magazine, Jul 2013.

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61 comments

My daughter in-law woks very early, she takes Uber to the office every day. Her boss pays the tab. Same for my daughter, she works late and gets an Uber ride home every night (also paid for). I use Uber regularly.

We love it. I will never take a Yellow cab again. For the life of me I can’t figure out what Eves has against the company. She has not downloaded the App (she does not have a smart phone). She has never taken an Uber ride. Why the beef?

This is a personal attack in lieu of a real argument. This is the best you can do?

It also appears despite us being up now to eight posts in the series that you haven’t paid attention to the plot.

Uber is giving people like you subsidies that total now $3 billion a year. New drivers get special incentives. There is a ton of churn in drivers, and that’s before you get to the fact that the overwhelming majority don’t understand their true economics, as in they don’t incorporate the wear and tear on the car.

Running any kind of transportation business involves trading off availability v. profits. The apparent ease of getting an Uber car is due to the massive subsidies, period. And that’s before you factor in that Uber regularly shows ghost cabs, as in it your app gives you the impression there are more cars nearby than there really are.

So Uber’s business model is not sustainable. It margins are not getting any better over time. It isn’t going to be a monopoly or even an oligopoly provider because there are no barriers to entry. It’s not hard to design one of those apps. And despite Uber having all this dough, apparently the driver end of the app sucks.

Once Uber’s investors quit subsidizing, as Hubert has explained ad nauseum, it is actually a higher cost provider than good old fashioned cabs, since it has no cost advantage anywhere, whatsoever, and at a minimum, its investors want higher returns than industry incumbents. So it will eventually wind up offering a price/availability no better than any traditional provider. And traditional cab providers have apps too. So Uber will either retreat to having yellow-cab quality service or its original higher pricer corporate “black car” niche.

And that’s before, per above, Uber amounts to labor exploitation, since it (and you) are taking advantage of drivers not understanding their true costs. Former Uber drivers have confirmed our assessment. I’ve also had local traditional cab drivers outside NYC (in markets where drivers own rather than lease cars like in NYC) tell me they applied to be Uber drivers and once they worked through the pricing, it was clear to them they would come out worse, as in what they would net for the exact same ride was markedly lower.

Moreover, YOU are being exploited too. Uber not only tracks you when you are not using an Uber car, it also downloads your contact list if you are not alert enough to have said no. How is that even remotely acceptable? They were forced to change their policies to make it somewhat more transparent, but pray tell, how many people read the fine print when signing up for apps?

I have one buddy who did look at the boilerplate and was outraged, since her contacts include whistleblowers.

Plus I am not willing to use a service where drivers rate me. If a driver does not know where he is going or takes a route that results in an unduly high price, I will chew him out. I don’t consider it acceptable for a driver to have the ability to take revenge on me for telling him he did a crappy job. And Uber drivers routinely rely on GPS, which does not show which streets are one-way, which means they regularly screw up in areas like the West Village and London.

Hubert has addressed the weird cognitive bias of people like you repeatedly. Just because you like it does not make it a viable long term business or ethical. It’s no different that the neighborhood restaurant you liked that closes and you learn later that they went under for perfectly understandable reasons, like not being able to pay their rent. I fail to understand why you are so obtuse about this.

>So Uber will either retreat to having yellow-cab quality service or its original higher pricer corporate “black car” niche.

*Or* they will finally use their billion-dollar hammer to make the politicians see it “their way”, and we will wind up with a new type of, call it Uber-Privatization where even the smaller private companies that worked better are forced out of business.

BK: my guess is you WILL take a yellow cab again in your lifetime. Second Yves comment about you either not paying attention to the articles or just being obtuse about Uber because its convenient for you.

Do you really think Uber is here to stay? The company is hemorrhaging money, probably can’t get an IPO completed b/c of its lousy financials, and is therefore desperate for more private money to stay afloat given that losses last year topped $3B.

My guess: you actually have not taken your last yellow cab ride. Time will tell, I suppose.

They even tried talking to two underwriters and tried not showing their financial statements! Sadly, Google being what it is, I can’ t locate the story, which is frustrating. But the mention occurred in the last three months.

No underwriter would ever even consider that, plus the SEC won’t allow it. They are running up against their limits of creating their own reality. Even “anything goes” Matt Levine regarded the fundraise at $62 billion as seriously dodgy:

Another Uber bezzle: buying back its own stock at a discount then reselling it at full market value.

Uber isn’t paying for liquidity on either side of the trade; it’s being paid for liquidity. When Uber sells stock to new investors, it can get a premium, because the stock is sexy and scarce and not available on the secondary market. When Uber buys stock from its employees, it does it at a discount, because the employees are desperate for liquidity and can’t sell their stock anywhere else. Uber can make a profit just on issuing and buying back its own stock. I kind of don’t understand why it would even bother building self-driving cars; it’s already built a perpetual motion machine.

I am amazed how these posts just want to ignore economics. (And also how they immediately get posted as the article does). If you like Uber and want to keep riding it, explain to me:

#1. How the service will continue when driver subsidies dissappear.

#2. How magically they are going to turn an internet ride sharing company into a logistics heavy self driving car company. All of the self driving cars are going to be a huge capital and maintenance cost that Uber has zero experience managing.

It will but rates will at the minimum double via the surge pricing mechanism. However, this won’t necessarily increase Uber’s gross revenue as Uber’s commission = base flat fee commission + percentage of total fare commission.

Presumably higher fares will decrease aggregate demand and an increase in percentage commission won’t necessarily offset the decline in rides.

>#2. Bingo. Way too capital intensive. Presumably the plan is that Uber will open its platform to third-party fleet providers.

And don’t forget that Uber can, at any time, be replaced by an app that just directly connects drivers to passengers, where the driver can call the price and gets reviewed. There would be no surge pricing, no base commission. Nada. Just a pure app where you essentially ‘rent’ a driver based on reviews.

Quite simple – If your daughter had to go to work for the same salary as the Uber drivers that take her to and from work, you wouldn’t feel quite the same way. Once you have nothing but Uber, and their prices rocket due to no competition, you will be begging for anything but Uber!

Uber has never made any business sense. Even a causal examination of the business model exposes Uber as another form of “taxi”. Price gouging (surge pricing) and driver poverty will not save them. They will never reach a point of monoply. As the subsides run out and trip prices rise, others will enter the trip market at a lower price.

It must be said that this PR war is effective. Here in Boston the Uber and Lyft have been given access to Logan both for pick up and drop off of passengers. Previously they were really only allowed to drop customers. Taxi drivers interviewed by the Boston Globe were despondent over this regulatory change that basically would remove one of their guaranteed profitable pick up spots.

The man who managed former President Barack Obama’s campaign has been slapped with a $90,000 fine for using Mayor Rahm Emanuel’s private email account to lobby the mayor on behalf of ride-sharing giant Uber without registering as a lobbyist……

In New Delhi , Uber’s own drivers are on strike for past seven days. Reason: Uber suspended giving driver incentive due to which income of drivers’ is reduced substantially . Many drivers are no longer able to pay installment on car purchase . I believe that this clearly indicates that without incentives drivers are unable to earn adequate income and drivers were under the idea that they were going to be paid incentives perpetually. Links:-

And if any of them lose their cars because they can’t keep up the repayments, there is asset seizure. . . Asset seizure could benefit those Uber investors / colleagues / banks who stand to benefit from acquiring distressed assets at bargain basement prices. Car-flipping as a variant on house-flipping.

Most of the Taxi owners in Minneapolis/St. Paul can no longer lease their cars for the night shift.

There are somewhere around 2500 regular taxis in the Metro area, and 15,000 Uber drivers, and while the day shift is still productive, night time business has been so badly impacted by Uber that drivers have stopped leasing taxis at night.

For a Taxi owner, loosing the $50/shift income from leasing his car at night is a heavy blow.

What I see when I spot an Uber sticker on the back window is a desperate, under-employed person unwittingly engaging in the destruction of the working-class for the profit of a very few clever sociopaths.

The long-term economic down-turn as experienced at the bottom, has provided a virtually infinite supply of naive and needy ‘independent contractors’ desperate to find a solution to the economic mess they have found themselves in ever since the folks at the top decided to pull the ladder up behind them.

Uber does not offer an honest opportunity to improve one’s lot in life, Uber pits the working poor against one another in a depraved scheme that could only work in an era of savage austerity.

“What I see when I spot an Uber sticker on the back window is a desperate, under-employed person unwittingly engaging in the destruction of the working-class for the profit of a very few clever sociopaths.

The long-term economic down-turn as experienced at the bottom, has provided a virtually infinite supply of naive and needy ‘independent contractors’ desperate to find a solution to the economic mess they have found themselves in ever since the folks at the top decided to pull the ladder up behind them.”

I’d say that sums it up pretty well. It’s a sign of the times. Looting, upward redistribution, etc.

I have enjoyed the entire series, but there is one question that comes up every time I read an article. The claim that Uber is the most highly value private company. Does this refer to venture-based start-ups or does it include the older family-owned capital-intensive firms like Cargill, Koch and Mars? If it includes the latter group, then there can really be no other explanation for Uber’s valuation than rent seeking

Most of this stuff, subsidies, non-IPO, etc, point logically to a long-game of driverless cars, by default. Without that, they are eventually toast. And even driverless isn’t necessarily going to save them, although given their connections with industry players, they should be able to construct some sort of advantage in that realm and skate by for a while, before they realize that competition is coming. They will hate regulation all the way up to the point where they realize they need it to survive. So, in the end, we’ll have a regulated monopoly car sharing robodriving future, led by Uber? I dunno, but the company stinks, and Travis is a scheming fraudster, and dupes like this Stone guy are just useful idiots.

Were it not acting so ruthlessly in trying to globally monopolize the business, there might be a place for a niche market version of Uber. I’ve met a number of Millennials lately who don’t own cars (some don’t even have driver’s licenses, which seems to be quite common in that age group compared to us old fuddy duddy Gen-X’ers), and for them a service like this in large urban/inner suburban areas does make sense. Unfortunately, everything in Silicone Valley has to be “bigger, faster, more.” Instead of being content providing a boutique service to those who might have a legitimate need, they have to unnecessarily and wantonly destroy as many other people’s businesses and livelihoods as they can.

“What I see when I spot an Uber sticker on the back window is a desperate, under-employed person unwittingly engaging in the destruction of the working-class for the profit of a very few clever sociopaths.”

Here’s what I’ve seen in Tucson:

Yesterday evening, I was at an after-work meeting in a building that also was hosting a meeting for prospective Uber drivers.

A couple of years ago, the same Uber meetings were packed with people who arrived well before the start time. We’re talking an hour or so before the start — a clear sign of people who don’t have jobs and have lots of time on their hands. Call them the down, out, and desperate.

Well, that was then and this is now.

I went by the Uber meeting room at 6:20 pm, and the start time was 6:30. Know how many people were there? Two people from Uber and two potential drivers. And, yes, the potential drivers appeared to be down, out, and desperate. Just like their 2015 counterparts.

So, looks like the word is getting out. Even the down, out, and desperate are steering clear of Uber.

Those people already have been sucked into the Uber meat grinder via subprime loans for new cars backed by promises of big fares from Uber (with presumably a referral bonus paid to Uber by yield-hungry lenders).

It’s one of the reasons why even w/low rates there are surplus drivers—-people are literally sleeping in their cars overnight, like at the airport holding lot—to make their $600/month payment on a Toyota Camry.

If you want to see the receiving end of modern share-cropping, hang out at your local big city airport holding lot for Uber/Lyft cars.

via subprime loans for new cars backed by promises of big fares from Uber (with presumably a referral bonus paid to Uber by yield-hungry lenders).

There have GOT to be connections to lenders as part of Uber’s business model, or at least through finance-related investors. Certain investors know they will make their money back through lending and/or asset repossession & flipping. A nod and a wink at a private investor pitch, and the lender stands to gain either way, plus the potential upside on share price. . . It could look risk-free, if one ignores the Ponzi component and that some investors will be more equal than others in terms of knowing when & how to exit.

Just wanted to say thank you for perhaps the only articles on Uber that aren’t ‘I have drunk the Kool Aid’.

And perhaps the only ones that have intelligence and analysis in them

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1) Uber leaving China is spun as being a great thing. That’s just propaganda. If it was a Chinese company leaving US and selling to its biggest competitor in the US market that company would have been buried alive

2) There’s not really an actual business. This is Tragedy of the Commons being used against drivers/people who are out of work. People who don’t understand the hidden costs of running a part time taxi business are being hired. Later to be replaced by automated cars

3) If we look at the early valuations that Uber got, it’s clear that this was not

A very successful fast growing company that got invested

This is more of a ‘made’ company. By spending a lot of money it’s been made to look like a huge success

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Looking forward to your future articles. My Dad does portfolio management and has a PhD in Risk Analysis and I’ll forward your articles to him. He often talks about the abrurdness of what is basically a cab hailing app being valued at such high figures

Makes me think that Uber and the driverless car thing are one and the same. The driverless car topic appeared suddenly all at once on multiple media platforms (even NC). It was the timing that made it suspect. Clear evidence of central strategic planning at high levels.

It feels similar to the way national & international & regional media put out stories about Trump that miraculously include the same keywords. Too much to be a coincidence.

The Uber / driverless mania has the same feeling, it’s been carefully designed and manufactured to produce certain effects on society (none of them positive).

While I’m sympathetic to your sentiments, I doubt that anyone is steering this ship of fools. I’ve attended conferences about autonomous driving and in my experience the higher one goes up the executive food chain, the more divorced people become from technological and economic realities.

I’m convinced that you could have a third-grader make a drawing of a hover-car, stamp it “Tesla Confidential” and leave it in a locker room frequented by automotive executives and you’d set off a new wave of mania in the industry.

“…that’s before you get to the fact that the overwhelming majority don’t understand their true economics, as in they don’t incorporate the wear and tear on the car.”

This is absolutely true. A friend of my son is a full time uber and lyft driver. (He is not good at working with others and it is actually a good fit for him.) he was telling me his income last year as he was going over having his taxes done. Gross receipts are down from last year. He has put 70000 miles on the car. After the government allowed deduction for mileage which is about 54 cents per mile he nets as income $7,000. He simply does not comprehend that he really only made 7 grand. He thinks he’s gaming the government.

As far as I can find online it seems that for most of the U.S. the oldest car Uber lets you use would be a 2010 model year. In some cities they appear to allow cars as old as 2001. I also think that one thing an Uber car and a regular taxi would have in common is near zero resale value due to the high miles and hard use.

Being a Cabbie some 30 plus years, on and off. I chuckle at the idea that anyone thought using their private vehicle as a cab was going to make them money. I live in Homer Alaska and the weather here is nutz to you gotta be kidding me. Road conditions change from mile to mile. Wear and tear on a vehicle is substantial. Our little cab company has but 5 cars. The owner has a full time job keeping up with maintenance,paper work, insurance, billing charge acct’s, And driving backup when needed.
As a driver i have to do a back ground check/w finger printing,physical exam every two years. Plus i have to pay the city for the privilege of working for less than minimum wage most of the year. But i get free coffee most anywhere in town. Most moms know to call the old grey haired DFH to deliver their little darlings safely to where ever. Can Uber match that?
Forgot to mention that there are areas here with no cell coverage.

The round last year for which it used a $62 billion was to Saudis. The round after that, a few months later, at $69 billion, was to high net worth individuals and omitted a lot of typical financial disclosure….like annual revenues and net income.

Great series. I’m curious if you consider any of Uber’s erstwhile or current competitors to be any different. E.g. what about Lyft, which lets drivers set their own rates and is thereby a step closer to using true “independent contractors”? Or what about local taxi companies with copycat smartphone apps (here in Edmonton we have a couple), which to me seems like a genuine, if small, competitive advantage?

Sorry if you’ve addressed this elsewhere; I haven’t read all the comments on all 8 posts.

The business method patents for ride-hailing were first granted during dot.com bubble I, circa 2000.

The guy who filed that patent ran his own ride hail company called Sidecar. Sidecar went belly-up in 2015—crushed by an awkward user interface and Uber’s VC-funded generous driver subsidies and blitzkrieg expansion.

Former Obama campaign aide David Plouffe has been fined $90,000 for breaking the city of Chicago’s ethics rules in lobbying Mayor Rahm Emanuel (D) on behalf of Uber.

The Chicago Board of Ethics in a 5-0 vote determined that Plouffe broke the rules by not registering as a lobbyist after seeking Emanuel’s support for rules to allow Uber to pick up passengers at Chicago’s airports, reports the Chicago Tribune.

The violation became public after Emanuel released hundreds of emails in December, bowing to pressure from two lawsuits claiming that he had violated Illinois’s open record law. …

Excellent post. I would add however, that UBER, as a phenomenon of “so-called- disruptive innovation” is a part of Wall Street response ,not to push for mainstream business innovation, but to ZIRP after 2008 and flattening of the yield curve in the environment of collapsing US and global economy. In other words UBER is an WS excretion of maddening dash for yield.

In a sense Uber is a WS digital financial product that epitomizes what some call social/economic propaganda of deed, as borrowed term from XIX anarchists who throw bombs to instigate a revolution that never came, and which ultimate results was death and destruction, and it was on a tiny scale what is expected when all those WS concocted financial entity die or be discarded .

Hubert Horan’s assertion that it all revolves around subsidies provided by Uber’s investors is an appealing solution, but I see one problem with it. Perhaps he can address it in his next contribution.

I find it hard to see how Uber is doing the subsidising. It is important not to conflate the two sets of books in the Uber system: Uber’s own and the vast externalised one borne by drivers and vehicle owners.

I had always assumed the company achieved it low fares by calling forth excess capacity, large parts of which make losses and flounders, but at a safe distance from Uber’s own books. It seemed like the system was premised on churn and losses suffered by drivers and the growing body of small investors who lease cars to drivers.

Uber’s 20-25% cut of fares may not cover the costs of it operations, but these costs have little to do with the running of a taxi.

They presumably spend their money on technology (the app and of course the robot cars everyone keeps talking about), lawyers and lobbyists and the minimal infrastructure they need in each city to recruit and vet drivers. I don’t know why these costs are greater than the 20% of the fare they rake in. The point is however that Uber is taking losses on this part of the operation.

Uber’s losses then have very little to do with its taxi service being inefficient, but with its expenditure on things unrelated to the basic underlying service.

That does not mean the service is not subsidised. It means that Uber is not providing the subsidy.On the contrary, Uber imposes additional costs on drivers/owners.

It is an important distinction because it means choosing one of two narratives to explain Uber’s ability to displace traditional taxis.

Yes, Uber is taking losses on its expansion drive. The argument here is however about the fundamental underlying economics of the Uber driver versus the traditional taxi driver.

The driver (and vehicle owner, who is most often a different person) must cover the entire cost of running a taxi service apart from the costs of regulations (which are avoided) and the marginal expense of a dispatching service.

Here you need a major caveat. Uber’s insistence on vehicles being less that a certain age (four years in South Africa at present, although that has shifted in other countries) actually ensures that the like-for-like cost base is higher. The fleet of pre-Uber taxi’s has been, in general, a lot older than four years. The Uber system carries more financing and depreciation costs, but let’s assume equivalent costs for the sake of argument.

For a subsidy to exist that makes Uber cheaper than traditional taxis, the drivers/owners’ 75-80% share of the fare needs to be less than the costs of the actual service, which would be comparable to the costs of a traditional taxi (including vehicle costs and remuneration).

If this is the case, at least in aggregate, then it is the drivers/owners who are subsidising the service. This could be through the provision of car finance or through low pay for drivers. My original intuition about Uber was that it creates an artificially high demand for taxi services, which is subsidised by a (externalised) bubble in vehicle investments and extremely precarious labour. This must at some point burst, although it can be kept going for a long time with enough new entrants and churn.

So, if Uber rides are subsidised, who is subsidising them? Billionaire investors or the drivers? The obvious answer is both, but the extent to which the billionaires’ subsidies have a real impact on the drivers’ ability to provide the service at market-beating fares is important for the argument being made.

The investors are subsidising the cost of expansion, separately from the actual taxi business (except for the incentives offered in some countries).

The drivers and owners of vehicles are probably subsidising the actual service through a large number of them providing it at a loss and dropping out to be replaced by new hopefuls.

The importance of this external subsidy in the Uber system is the fundamental question and without Uber’s own data it is probably impossible to answer. It does however amount to a different explanation than the one favoured by Horan: that it is primarily the investors’ subsidy that makes the difference.

It also changes the nature of the envisaged end game and the question of whether Uber can “grow into growth”. Once a certain mass is achieved, the system can make money for investors, if the driver-provided subsidy remains for long enough.

A natural test may be coming up, in South Africa, in that the system could soon face an interesting debt cliff.
The Uber system has been established here just long enough for the first wave of vehicles to now be too old to continue being part of the system. If the system works, these used vehicles are paid off or at least carry a resale value equal to outstanding debt. If the system has been subsidised through this channel (an externalised balance sheet for vehicle acquisition), a lot of people are going to start taking a knock as they need to finance new vehicles. I’m interested to know how the system has aged past its vehicle-life threshold in other countries.

I think if you go back to parts 1 and 6 of this series (which lay out the operating P&L data in tables) and part 2 (which lays out the overall cost structure of taxi operations) your confusion here will be largely resolved. I had spelled out very clearly that the “Uber business model” includes the separate “driver” and “Uber corporate” portions. If total passenger fares don’t cover the total costs of both, the business model eventually fails. Those total costs include fuel, licensing fees, vehicle ownership/ /financing/maintenance and net driver take-home pay (paid by drivers in the Uber model) and dispatching/software/pricing systems, branding, corporate development (e.g. lobbying, new market startup costs, driver recruitment) and corporate financing costs.
One semantic point—“subsidies” refer to the deliberate choice to incur short-term losses in the hope that markets grow to the point of earning profits large enough to both recoup the subsidy costs and provide returns to capital. Uber drivers cannot be subsidizing operations unless they are deliberately accepting take-home pay well below market rates because they think they will soon be earning above-market pay rates high enough to fully compensate them for their short-term sacrifice. No Uber driver is doing this. Many are earning less (net of vehicle costs) than they could have earned at traditional cab operators, but this is because they have not thought through the true vehicle costs and/or Uber has willfully deceived them about true compensation levels and have locked them into vehicle financing contracts they can’t get out of. There is a huge difference between workers finding that their pay has been unilaterally cut, and a deliberate decision to temporarily accept below-market wages, as with a recent graduate accepting a low-paid intern position at a company in order to build up a resume in the hopes of much higher paying jobs in the future.
The capacity Uber has called forth is not at a safe distance from Uber’s books. Uber takes its commission (30% is currently standard in the US) from all drivers on all trips. That 30% needs to cover the “corporate” costs mentioned above. In 2015 actual corporate costs were $2 billion higher that the commission revenue Uber collected from drivers; in 2016 they will be $3 billion higher.
Yes, Uber’s losses have a great deal to do with its being inefficient, i.e. unable (between Uber corporate and its drivers) to produce cab service as cheaply as traditional operators. This is discussed in detail in part 2. Vehicle costs are much higher. Corporate costs are much higher. In its earliest years Uber drivers appeared to have slightly higher take home pay than traditional drivers, so these costs were higher too. The recent commission cuts have eliminated much of the driver pay cost disadvantage but unless Uber achieves the market dominance they have been working towards drivers will not accept these below-market pay rates indefinitely.